Property owners face another financial disaster

Merry Christmas, Louisiana. Here’s your present from the public officials you sent to the state capitol: a big boost in your property insurance premiums! All from the same folks who have been sticking you with higher rates for years because of their poor oversight and downright incompetence. So get out your checkbook and enjoy your holidays. More increases are on the way.

Just three weeks ago, State Farm policy holders were blind-sided with a whopping rate increase of as much as 14 percent in some parts of the state. Many customers are wondering why such a rate increase was implemented. The economy has stagnated, there is little inflation and prices across the board are down. Insurance rates are dropping in many other states, but Louisiana continues to have the highest premium costs in the nation. There have been no recent serious weather related damages throughout the state. So how can an insurance company justify a rate increase during this troubling economic climate? Simply put, they did it because they can. In the majority of states throughout the U.S., insurance companies have to file a request to raise rates before the insurance department. Actuaries and other insurance officials scrutinize these requests to be sure the rate request is justified. But not in Louisiana! The insurance industry did some heavy lobbying a few years back and poured hundreds of thousands of dollars into the coffers of willing legislators and insurance regulators. And voila – no more prior approval to raise rates required. Such “sweetheart deals” do not exist in Texas, Mississippi, Arkansas or in virtually any other state throughout the south. And guess what? Property insurance rates are much lower outside Louisiana.

So that was the bad news three weeks ago. But now, if you own a home, here’s your New Year’s present. Every property owner in the state is about to be stuck with yet another assessment on their property because of the incompetence and outright fraud on the part of those who both formed and have run the state created Citizens Property Insurance Company. Just last week, the Louisiana Supreme Court ruled that Citizens will be stuck with a judgment approaching $100 million for failing to pay claims to property owners following Hurricanes Katrina and Rita in a timely manner. Private sector companies followed the law and paid the money owed for damages appropriately. But the incompetence and tardiness of the public officials in charge rose to the level of mismanagement. The requirements that other companies complied with were ignored by Citizens. Following the court’s ruling, Fred Herman, the New Orleans attorney for a large number of unpaid homeowners, blasted the public officials in charge by saying, “It demonstrates the utter and abject failure of Citizens to perform their statutory and contractual obligations to their insureds… Those are the types of things that people need to understand when they’re re-electing them.”

And the bad news for Louisiana homeowners could get much worse. There is a separate claim of incompetence against Citizens by 10,000 more homeowners that could cost property owners an additional $50 million. And this money, that could exceed $150 million, does not come out of the state treasury. It will come from an assessment on every Louisiana property owner, regardless of who his insurance company might be.

Citizens Insurance Company was a disaster waiting to happen from its very inception. Created by the Louisiana Legislature at the behest of the Insurance Department, Citizens had to be one of the most poorly constructed business operations ever conceived by a state legislature. The company was broke from day-one, with no capital and no surplus available to get Citizens started on a sound financial footing. It became obvious early on that no one at Citizens had any idea of how to run an insurance company.

In addition, a mother’s mantra of any successful insurance company is that there must be adequate reinsurance. There must be a safety net in case a storm like Katrina comes along. The legislature and the insurance department failed to require that Citizens have sufficient reinsurance, and that single negligent decision stuck every policy holder in the state for a bill that will far exceed $1 billion. By virtually every standard that any private insurance company must measure up to, Citizens has failed miserably.

The best solution would be to shut the company down completely. At a minimum, Citizens needs major restructuring with more requirements for both legislative and auditor oversight. Unfortunately for those stuck with the bill, there seems to be little concern at the state capitol to straighten out this publicly-created disaster that continues to fester and grow.